A trader works on the floor of the New York Stock Exchange in New York on July 7, 2008. Photographer: Gino Domenico/Bloomberg News
Highlights:
- Worldwide Slow Down: "Oil in New York has dropped more than $9 since reaching a record $145.85 a barrel on July 3. Gold, silver, copper and corn also declined. The U.S. economy has sagged amid credit-market and housing slides. Contracts to buy previously owned homes fell more than forecast in May, signaling prices have yet to bottom."
- Global Recession: "All the bad economic news is making people take a second look at commodities,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Commodities were purchased as a hedge against inflation. A global recession is looking more likely, and it's the greatest weapon in the fight against inflation.''
- Group of Eight: ``We have strong concerns about the sharp rise in oil prices,'' the Group of Eight said in a statement today in Tokyo, where the leaders are holding their annual summit. ``The world economy is now facing uncertainty and downside risks persist.''
Comments:
Deflation: Is the elephant in your living room. Nobody know which way the knife will cut, Inflation or Deflation. We are focusing on inflation because that is what most of us know and can relate to from past experience. However, while we are watching the inflationary birdy and trying to formulate a strategy, the deflationary cat is stalking it's prey.
What Occurs during Deflation: (Source: Wikipedia)
- While consumers can buy: more with the same amount of money, they also have less access to money (e.g., as wages, debt, or the return realized on sales of their products). Consumers and producers who are in debt, such as mortgagors, suffer because as their (money) income drops, their (money) payments remain constant.
- Central bankers worry about deflation: because many of the tools of monetary policy become ineffective as inflation drops below zero (deflation).
- Deflation may set off a deflationary spiral: where businesses slow or stop investing, because the investment risk is perceived as higher than just letting the money appreciate due to deflation.
More to Come: I will continue to focus on this under-report aspect of the economy. Unless the underlining assets in all of these structure fixed income deals stop loosing value, any talk of a "Turn Around" is just hot air disappearing in the wind.
Jim
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